Money, as we know it, is changing. What’s intriguing, however, is how fast this change is happening and the possibilities that this new era of money opens up. Financial technologies (a.k.a. FinTech) are at the center of the Future of money; this makes FinTech software development a hot topic among stakeholders in the financial sector.
Fintech adoption among US consumers reached 88 percent in 2021, according to Plaid. At this rate, more people are using fintech solutions than video streaming or social media. This guide discusses the factors driving this Fintech disruption and its significant changes to the financial service industry.
What is FinTech?
Fintech is the product of technology disruption in the financial sector—the intersection of financial services and emergent technologies. Technological advancements are disrupting the financial industry in the same way it has transformed sectors like housing, transport, and entertainment. Financial technologies include software, algorithms, applications, and in some cases, hardware intended to transform how financial services are packaged, delivered and consumed. With a strong focus on customer experience, fintech solutions offer more value, ease, speed, and variety to traditional banking and financial systems.
There are at least six aspects of fintech applications, including:
- Payments: Tech that facilitates cashless payments.
- Insurtech: Tech innovation for Insurance.
- Regtech: Tech for managing financial regulatory processes.
- Cybersecurity: Tech for protecting online systems from digital attacks.
- Wealthtech: Tech for managing financial investments.
- Blockchain/cryptocurrency: A distributed ledger technology (DLT) that facilitates secure transactions and tracking of assets.
Fintech not only provides financial services to the underserved, but it also proffers new and innovative solutions. For example, solutions could be simple mobile bank app features or sophisticated automated financial advisors, – says Slava Vaniukov, expert and CEO of Softermii.
What is driving the growth of Fintech?
Fintech has had a meteoric rise since it gained prominence. According to a KPMG report, global investment in financial technology rose from $930 million in 2008 to over $120 billion in 2020. This rapid growth in the sector results from factors including the e-commerce boom, the abundance of consumer data, and the drive for financial inclusion.
The Rise of E-commerce
The dramatic increase in e-commerce activities globally has coincided with a similar appetite for Fintech solutions. Beyond coincidence, e-commerce brings the need for fast, easy, and secure online payments, which is the forte of Fintech startups.
The abundance of Consumer Data
Fintech companies leverage vast amounts of consumer data to proffer personalized financial services to different customer segments. Data available from digital sources like social media, search engines, and online purchases are helping tech innovators to identify and develop relevant financial services that suit each consumer persona. The more data available, the more tailor-made fintech solutions there can be.
A big motivation for fintech providers is the ability to reach vast populations worldwide where traditional banking has failed to penetrate. The World Bank reckons that mobile money accounts, an aspect of Fintech, introduced 1.2 billion adults to financial services over the last decade, reducing the unbanked population by 35 percent. In addition, tech innovators are poised to bring financial inclusion to the nearly 2 billion persons still unbanked.
Main trends in the financial services industry
Digital innovation has been a recurrent theme in the financial sector in the last couple of years. While digitization continues to be a critical factor, newer themes are set to shape financial services in the coming years. The industry will have to deal with a new generation of customers who are more majorly digital natives. The sector will also respond to rapid fintech innovations along with the changing regulatory dispositions. Here are a few trends to look out for:
1. Customers seek Financial Service Providers that offer Personal Financial Management (PFM).
Personal Financial Management is becoming increasingly important to customers, especially Gen Z. This younger, tech-savvy consumer group requires special financial services and tools for saving, budgeting, spending, and financial planning. It helps if these services are offered by their primary financial service providers and tailored to their lifestyles. Expect new consumers to tend towards institutions that provide the best online platforms and mobile apps that allow users to control their finances remotely.
2. Gig Economy Workers to form the Next Big Frontier
As the gig economy continues to expand, financial institutions will find ways to attract and serve a burgeoning number of independent workers. Income from digital gig work is expected to reach $455 billion this year. Because they are traditionally seen as high-risk customers, gig workers do not get many financial service offerings. However, given that half of the US population is expected to do gig work by 2028, this customer segment is too big to be ignored. In addition, modern technologies for accurate risk assessment and financial planning enables financial service providers to serve this customer segment better.
3. Big Tech to Claim Big Stake in Financial Services Revenue
As financial services become more digital, big tech companies like Amazon, Apple, and Google have taken the bait to compete with incumbent financial service providers. According to a McKinsey report, these tech giants with a broad global reach could collect up to 40% of financial services revenue.
The changes that accompany the Fintech disruption are two-pronged. On the one hand, this application of digital technologies in the financial sector is creating opportunities in the financial sector, promoting financial inclusion and economic development. Latest internet technologies, mobile app development, and artificial intelligence (AI) are deployed to create more effective and efficient consumer financial products.
Fintech’s rapid growth, on the other hand, poses challenges to regulators who must broaden their scope to meet the ever-expanding borders of digital finance. They must create policies that mitigate risks without stifling innovation in the sector. This requires a broader oversight of the industry using modern supervisory methods. It also calls for cross-border cooperation to ensure global financial best practices.
Finally, regulators need to encourage healthy competition in the financial sector especially given the entry of big tech. It could open up financial infrastructure and influence market structure to favor competition.